China's No.2 telecommunications equipment maker ZTE Corp, under fire in the United States over cyber security concerns, has sold a subsidiary which sells surveillance systems.

The decision to dispose of ZTE Special Equipment Co, also known as ZTEsec, was made on September 21, during a U.S. Congressional committee investigation into ZTE (Shenzhen, China) and its local rival Huawei Technologies Co Ltd (Shenzhen, China).

The Congressional committee recommended to the U.S. government that Huawei and ZTE should be kept from the U.S. market and told U.S. companies to stop doing business with both firms.

The committee's report, published on October 8, said it "cannot allay concerns that ZTE is aligned with Chinese military and intelligence activities or research institutes." ZTE has denied any such links.

In a filing to the Hong Kong Stock Exchange in September, Shenzhen-based ZTE said it had sold its 68% stake in ZTEsec to 10 Chinese investment companies including Shenzhen Capital Group Co Ltd.

The sale, worth between 360 million yuan and 440 million yuan ($57 million-$70 million), would allow ZTE to "focus its resources on its principal businesses in line with the requirements of its strategic development," it said.

ZTEsec, set up in 2003 with a registered capital of a million yuan, could ultimately pursue a listing in China's stock markets to raise funds for research and expansion purposes, business analysts said.

The company, however, has mostly attracted attention as the most visible ZTE unit selling surveillance, equipment to governments and law enforcement agencies.

ZTEsec's English-language home page describes its customers as "law enforcement and agencies" focusing on criminal groups and terrorists which disseminate hostile "messages, communicate and share information that endangers national security and safety of people's life."

An investigation by Reuters earlier this year found that ZTE had sold to Iran's largest telecommunications firm a powerful surveillance system capable of monitoring landline, mobile and internet communications.

Reuters also reported that ZTE had sold or agreed to sell Iran embargoed U.S. computer equipment, sparking investigations by the U.S. Commerce Department, the Federal Bureau of Investigation and the U.S. companies who made the products.

ZTE said after the Reuters report that it was curtailing its business in Iran and that it had stopped looking for any new customers in the country.

ZTEsec has showcased its security products at several international trade shows, offering products to government and law enforcement officials that it said could detect passwords of popular webmail services from Yahoo (Sunnyvale, USA) and Google (Mountain View, USA), filter out anti-government Internet traffic, capture cellphone data, tap phone calls and mine troves of intercepted data.

Its most recent presentation to a gathering in Dubai in February was entitled "Integrated Solution for National Security and Crime Investigation - Our Focus."

(This version of the story has been corrected to add dropped word "to" in third paragraph)

(Reporting By Jeremy Wagstaff in SINGAPORE, Lee Chyenyee in HONG KONG and Steve Stecklow in LONDON; Editing by Ryan Woo)